January 2003
The new year brings renewed hope for a return to profitability for
hog producers. Last year was another tough one as hog slaughter reached
100.3 million head, the second highest annual count after the 101.6
million head of 1999. Pork production set a record at 19.7 billion pounds,
surpassing 19.3 billion pounds in 1999.
Prices were of course depressed in 2002. The annual average price for
51% to 52% lean hogs on a live weight basis was $34.90 per hundredweight,
$11 lower than in 2001. Another discouraging factor was an increase
in estimated production costs by about $1.50 per live hundredweight
to an estimated $38.60. Losses for average costs farrow-to-finish producers
taking spot prices were estimated at $3.70 per hundredweight. The largest
estimated losses occurred in the last two quarters when they averaged
$6.10 and $8.20 per hundredweight.
For 2003, price and profit prospects brighten considerably because
of both supply and demand factors. Slaughter is expected to drop to
97.9 million head, a 2.4% reduction. Pork production is estimated to
be at 19.4 billion pounds, a 1.6% reduction.
Perhaps more important to hog prices will be a reduction in supply
pressure from other meats and poultry. USDA is currently expecting beef
production to drop by 5.5%, with chicken production up only 1.4%, and
turkey unchanged. Added together with the decline in pork production,
total meat and poultry supplies are anticipated to drop by 1.6%. A decline
in total U.S. production of meat and poultry is rare. The last time
this occurred was in 1982. A drop of 1.6% in total meat and poultry
production means about a 2.5% drop in per capita supplies.
The decline in pork production is a result of a declining breeding
herd as the industry experienced financial losses starting last spring.
In the last-half of 2002, sow slaughter averaged about 12% greater than
the same period one year earlier. As a result, USDA reported that the
breeding herd had dropped 3.2% by December 1. The total number of animals
in the herd stood at only 6.0 million, the lowest number since USDA
began tracking the breeding herd in 1963. Farrowings in the fall of
2002 were down by 2.5%, and pigs per litter were constant at 8.83 pigs
per litter. Intentions for the winter quarter are down 1% and the spring
quarter are down 3%.
Prices for 51% to 52% lean hogs on a live basis are expected to increase
to near $40 for the year. Price recovery in January and February into
the mid-$30s may be a bit slower than anticipated prior to the report.
However, much of the price recovery for the year could come in the months
from March to June, perhaps reaching the mid-$40s by June. Third quarter
prices are expected to average near $40, with prices in the fall of
2003 falling back into the mid-to-higher $30s.
When might we see the highest prices on the next cycle? The most recent
loss period stretched from the 2nd quarter of 2002 through the 1st quarter
of 2003. Generally it takes about 4 to 6 quarters after the loss period
to reduce farrowings and 6 to 8 quarters to increase prices. These cycle
guidelines would provide the best prices on the cycle in late 2003 and
the first-half of 2004. If so, once the industry turns back to profits
in the spring of 2003, we can expect a favorable return period through
the summer of 2004.
Given the tight carryover situation for both corn and soybeans, some
ownership protection, especially on corn seems worthy of consideration
at this time. Soybean meal prices will be sensitive to weather in South
America through the winter, and corn prices will be sensitive to the
pace of exports and weather in the U.S. through next summer. Thinking
about new crop prices, I am not looking for a return to the depressed
corn prices of the 1998 to 2001 crops. At this point, I would anticipate
the 2003 crop to have an average U.S. market price of about $2.25 per
bushel rather than the sub $2.00 of the abundant crop years. This means
that hog production costs, while dropping, will not achieve the low
levels experienced from 1998 to 2001.
In the past I have argued that producers should be cautious about using
futures to hedge when price prospects are improving as they are now.
This is because the ultimate cash market prices have tended to be higher
than anticipated by futures. Following this logic, hedging with options
tends to be preferred. Of course, everyone wonders just how much faith
to put in historical facts in the "new" hog industry, and
thus each individual will have to evaluate the opportunities to "lock
in" profitable hog prices using futures or options over the next
14 months.
Chris
Hurt
January 6, 2003
Purdue University
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